IntercontinentalExchange to Acquire NYSE for $8.2 Billion

Proposing to combine the owners of the biggest American stock exchange and the second-largest futures market may revive the wave of exchange takeover offers from 2011, almost all of which failed. Photographer: Jin Lee/Bloomberg

IntercontinentalExchange, based in Atlanta, will pay $33.12
a share for the owner of the New York Stock Exchange, 38 percent
above yesterday’s closing price, according to a statement today.
Both boards approved the proposal and the companies expect to
complete the transaction in the second half of 2013. Last year,
the U.S. blocked a joint hostile bid by IntercontinentalExchange
and Nasdaq OMX Group Inc. for the New York-based company on
concern the combination would dominate U.S. stock listings.

Merging NYSE Euronext, which owns the biggest exchanges by
value of listings in the U.S., France and the Netherlands, with
the second-largest futures market underscores both the growing
importance of derivatives and the diminishing influence of the
220-year-old NYSE. The Big Board, once the benchmark for global
free markets, has seen its share of trading in stocks listed on
the exchange decline to 21 percent from 82 percent.

“Not only are they losing volume, they’re also getting
squeezed in their margins because of all these competitors who
have different corporate structures,” Thomas Caldwell, who
oversees about $1 billion as chairman and chief executive
officer of Toronto-based Caldwell Securities Ltd., said in a
telephone interview. His firm owns shares of NYSE and ICE.
“They’re languishing as everyone sits and waits for cash equity
volumes to pick up, which may or may not occur for several
years.”

Jeffrey Sprecher, the chief executive officer of
IntercontinentalExchange, will head the combined company, with
NYSE CEO Duncan Niederauer becoming president. Discussions that
led to the takeover agreement began in October, Niederauer said
in a telephone interview. The companies plan to explore an
initial public offering for NYSE’s European equities unit.

A takeover would mark an unusual success after more than
$32 billion of exchange takeovers failed since October 2010.

“This is a much easier deal to get done,” said Brian
Barish, who helps oversee about $7 billion including about 4
million NYSE Euronext shares as president and chief investment
officer of Denver-based Cambiar Investors LLC. “When Nasdaq was
talking about doing something with NYSE, there were obvious
antitrust market concentration problems. ICE is a totally
different story because they don’t do equities.”

Unsolicited Bid

Under the terms of the agreement, NYSE shareholders can
elect to take $33.12 in cash, 0.2581 share of
IntercontinentalExchange, or a mix of $11.27 in cash and 0.1703
stock, according to the statement.

The companies said the majority of the $450 million in
estimated savings will be achieved in the second year after the
deal closes. The transaction will increase earnings by more than
15 percent in the first year, according to the statement today.

Sprecher joined Nasdaq OMX CEO Robert Greifeld in an
unsolicited bid for NYSE Euronext in April 2011. The offer,
scuttled by the Justice Department seven weeks later, sought to
derail NYSE’s pending merger agreement with Deutsche Boerse AG.

Cost Cutting

The merger with Deutsche Boerse was rejected by European
competition authorities in February because it would have
created a dominant European exchange operator for derivatives.
NYSE Euronext subsequently began a cost-cutting plan known as
Project 14 and said on Nov. 6 that it generated savings of $82
million so far this year, 33 percent of the total $250 million
expected by the end of 2014.

“The business for the New York Stock Exchange can only get
better,” Sprecher said in a phone interview about stock
trading. Regulatory changes in U.S. equities are likely and
“the new model will favor the NYSE,” he said.

In addition to the Big Board, the company operates bourses
in Paris, Lisbon, Brussels and Amsterdam and London-based Liffe,
Europe’s second-largest derivatives market. NYSE adjusted
earnings were $653 million in 2011 on revenue of $4.6 billion.
The company posted profit of $357 million in the nine months
through Sept. 30, down 32 percent from the same period in 2011.

“The rationale for the deal is to cut costs in an industry
that is encountering reduced volumes and an increased regulatory
burden,” Peter Lenardos, an exchange analyst at RBC Capital
Markets in London, said today. The transaction is also “for ICE
to gain access to European derivatives as NYSE is the owner of
Liffe,” he said.

Clearing Services

Liffe will be merged into London-based ICE Clear Europe,
the exchanges said. The two companies have agreed to a clearing
services contract where ICE Clear Europe processes all of
Liffe’s trades, according to a separate statement today.
Niederauer said this ensures NYSE has a way to clear futures
trades if the deal with IntercontinentalExchange falls through.
When the union with Deutsche Boerse ended, NYSE, which had
delayed building its own clearinghouse in Europe, was left with
no partner and a stalled process to form its own clearinghouse.

“Putting ICE and Liffe together would create a major
London-based derivatives exchange, specializing in interest
rates, commodities and credit,” said Richard Perrott, exchange
analyst at Berenberg Bank in London. He rates ICE a buy and NYSE
Euronext a hold. “Liffe would shift to using ICE’s existing
clearing services, removing the need for NYSE Euronext to pursue
its own” central clearinghouse, he said.

The New York Stock Exchange, formed in 1792 under a
sycamore tree on Wall Street, became the center of American
capitalism through its grip on trading and listings for
companies from Ford Motor Co. to AT&T Inc. and DuPont Co.

Faded Reputation

The Big Board’s reputation faded in the last decade when
scandals highlighted the potential for collusion on the NYSE
floor and faster technology reduced the need for middlemen. In
September 2003, Chairman Richard Grasso ended a 36-year career
at the exchange as regulators and directors said a $140 million
pay package called his leadership into question.

Grasso’s successor, John Thain, orchestrated the 2006
reverse merger that gave the NYSE control of Chicago-based
Archipelago Holdings Inc. and turned the member-owned exchange
into a public company. By then, regulatory directives aimed at
lowering transaction costs for investors were in the process of
cutting the NYSE’s market share.

Buying NYSE Euronext is a way for Sprecher to get access to
the company’s Liffe derivatives platform, Diego Perfumo, an
analyst at Equity Research Desk LLC, an investment advisory firm
in Greenwich, Connecticut, said in a phone interview.

Liffe Access

“When Deutsche Boerse and NYSE Euronext tried to merge,
ICE immediately partnered with Nasdaq and tried to poach NYSE
away,” Perfumo said. “ICE was going to keep Liffe and Nasdaq
was going to keep the rest of NYSE. Short-term interest rate
futures are 70 percent of Liffe’s business and the other 30
percent is equity derivatives, which is an undervalued asset
within NYSE Euronext. What Sprecher is after is Liffe.”

Sprecher founded IntercontinentalExchange as an online
marketplace for energy trading. Its seed capital came from
settlement money collected by Sprecher’s previous company,
Western Power Group, in 1996 tied to a lawsuit over an
agricultural-waste burning power plant in Southern California.

IntercontinentalExchange offers contracts based on European
energy commodities such as Brent crude, natural gas and heating
oil at its London-based ICE Futures Europe exchange. In the
U.S., it has futures on agricultural commodities such as coffee,
cocoa and sugar as well as Russell stock indexes and currencies
at ICE Futures U.S. The company owns the world’s largest
clearinghouse for credit-default swaps, ICE Clear Credit LLC.

Enhanced Products

“The combined company could enhance the products offered
across asset classes, cross-market to different client bases
with different needs, expand ICE’s reach in Europe to NYSE’s
exchanges and drastically reduce the cost of futures
regulation,” Joseph Greco, a managing director at Meridian
Equity Partners, a New York-based broker that has traders on the
NYSE floor, said in an interview. “For NYSE it would augment
the futures and derivatives footprint domestically.”

With more than 1,000 employees, IntercontinentalExchange
earned $521.7 million in net income from revenue of $1.3 billion
in 2011 when its profit margin was 39 percent. For the first
nine months of the year, 87 percent of Intercontinental’s
revenue came from clearing and transaction fees.

As of Sept. 30, the company had $1.24 billion in cash and
cash equivalents and had issued $400 million in bonds due in
2018 and 2021, according to data compiled by Bloomberg.

Add Scale

Equity-exchange executives have sought to add scale through
mergers and acquisitions after the number of U.S. and European
trading venues increased by about 50 in the past decade, driving
down profitability. Stock trading has also declined, with daily
volume of U.S. exchange-listed securities averaging 6.44 billion
shares this year, the lowest level since at least 2008,
according to data compiled by Bloomberg.

Populist outcry, antitrust concern and some of the most
volatile markets on record have prevented the completion of more
than $32 billion in announced transactions, according to data
compiled by Bloomberg on deals since October 2010 that were
valued at $1 billion or more.

The transaction needs approval from U.S., U.K., French,
Dutch and Belgian securities regulators and antitrust
authorities in the U.K., Portugal and Spain.

“Given the highly regulated nature of transparent markets
such as ICE and NYSE we will have to secure the necessary
antitrust approvals in Europe and the USA,” Mark MacGann, head
of European government affairs and public advocacy at NYSE
Euronext said. “We welcome the opportunity to engage with
European decision makers in a constructive manner.”